News Flash: Your Debt is an Emergency!!

I like to think of Mr. Money Mustache as an advanced personal finance blog. We don’t talk about cutting up our credit cards, or clipping coupons to save $5.00 on the newest Swiffer mop, or making a budget that forces us to save 10% of our income while we devote the rest to “guilt-free spending”.

I don’t talk about my own personal battle with consumer debt and how much I struggled to get out of it, because come on, I am Mr. Effing Money Mustache. I was cleaning and ironing my five dollar bills and storing them meticulously in a photo album at age ten*, obviously I was never going to go out and spend so much on my credit card that I couldn’t pay it back at the end of the month!

This unique history and perspective allows me to see some things that are not immediately obvious to people who have been raised in the current consumer/debt society. And for all the Beginner Mustachians in attendance today, I would like to share one of these observations:

Your Debt is not something you “work on”. It is a HUGE, FLAMING EMERGENCY!!!

Let’s illustrate what I mean with a few examples:

One time, I lent money to a friend so he could pay his university tuition. The cash came right out of my own bank account, and since I had already paid my own tuition, I had just enough left to cover my groceries and other expenses for the school year. After the loan, that left pretty much nothing, but I assumed that my friend would have the balance paid back within just a few paychecks. I was therefore surprised when the friend proceeded to live a normal university life of partying and eating out, even during the delayed repayment process. Everything worked out fine in the end, since this was an honorable friend, but I still learned something about society’s differing opinions about debt.

On another occasion I was visiting some friends – a married couple. The guy was showing me his new TV and video game system. Later, the wife came home from working at the part-time second job she had boldly taken to accelerate the paydown of some old personal debts. On the way home from work, she had picked up a bottle of wine and purchased a DVD containing some episodes of a popular TV show. This may sound like a normal Friday night to most people, but note that the purchasing of expensive beverages, DVDs, and video games was put at a higher priority than paying off the debt. The girl thought she was taking a second job to pay down debt, but in reality her second job was to pay for wine, DVDs, and video games.

And finally, nowadays I receive emails from people who are working on developing their own Money Mustaches. They often detail income, spending, and debt situations. Often, there is a category for credit card debt. Yet these budget sketches also include amounts for entertainment, cable TV, and multiple cars.

The final straw was when I ventured out to poke around on some other personal finance sites last week. I found one that had a post from one of the authors, containing a table like this:

Do you see the glaring problems in these stories? If not, you have not yet developed the appropriate hatred for unnecessary debt. So let me spell it out for you.

The correct response to this sort of debt is, “AAAAAUUUUUUGGGHHHH!!!! THERE IS A CLOUD OF KILLER BEES COVERING EVERY SQUARE INCH OF MY BODY AND STINGING ME CONSTANTLY!!!! I NEED TO STOP IT BEFORE I AM KILLED!!!”

Go back and imagine this person about one month after they got that first Bank of America credit card. They went out for dinner a few times a week and bought some shoes and a few tanks of gas in that first month, and eventually the bill came in the mail for $1125. They realized that they only had $600 in the bank, but that was OK, since the “minimum payment’ was only $75.

In the absolute worst case, it is at this moment that the emergency bell should sound, for anyone in the world. The response should be:

SHIT!!! I just totally blew it and spent more money than I earned! I need to fix this immediately, so obviously all spending beyond food, and getting to and from work in the cheapest way possible, is now suspended. No, I don’t need a budget to pay back my debt, and I certainly don’t need two more credit cards. I simply need to do zero extra spending until my debt is corrected.

Logically, it follows that even if you only wake up several credit cards later and realize that you have fucked up, the emergency applies to an even greater degree.

If you borrow even one dollar for anything other than your primary house or a profitable investment, the very next dollar you can get your hands on should go to paying that back. You don’t space it out all nice and casual with “monthly payments”, and you don’t have a “budget”, “entertainment allowance”, or any other such nonsense. You don’t start a family or get yourself a dog, and you don’t go out for drinks and dinner with your friends. There will be plenty of time for these things later, and they will feel much better when they are not set against the backdrop of Incorrect Debt Due to Error.

Don’t worry, there is nothing wrong with making errors. They are actually good things, since they help you to learn. But you learn by fixing them, rather than letting them ride.

“Sure Mr. Money Mustache”, some beginners will now say. “Of course you would say that, but I’m still less practiced than you. I still need my Starbucks Lattes and my husband likes TV sports so I can’t cancel cable. Can you please stop punching me in the face and let me adjust my consumption gradually instead of suddenly?”

Wrong Attitude! Even if you are an absolute Beginner Consumer Sucka and your goal is still to consume the maximum amount of luxury products, you are still cheating yourself out of stuff just by running a consumer debt balance. Every dollar you pay in interest to the credit card company is stealing dollars away that you could be using for more luxury purchases for yourself. Those dollars are gone forever, and you’ve permanently lowered your ability to consume luxury products, for the rest of your life.

Since you need those luxury products so much, you’d better get out of debt quickly so you can afford to buy more. The credit card debts above are eating up over $4000 per year of your after-tax salary just due to interest payments. That’s hundreds of lattes, several pairs of shoes, thousands of miles worth of gasoline for your SUV, and even some massages at the spa and a couple of cross-country flights that you are foregoing every year.

Or, of course, once you start your Money Mustache, the interest savings could also be used to shave decades off of your mandatory working career..

And there is more good news, since this is an Advanced blog: your debts are tiny.

I always have a little chuckle when people talk about a $10,000 debt, or even a $70,000 or $200,000 one as if it is insurmountable.

Sure, these sums of money are big when measured against the cost of groceries, and they are not sums of money to be wasted. But this is an early retirement blog. Here we are learning how to rake together much larger sums of money to allow us to live our lives free from mandatory work. For most of us, that means somewhere between $400,000 and $1.5 million. Beginners to Mustachianism find these sums unimaginable, but after a few years, the same people find their net worth spreadsheets increasing at over $100 grand per year due to investment returns and reduced spending. Getting rich really is an exponential process, a concept it is hard to grasp until you realize that your money can work harder than you can. Once this higher level of financial skill is reached, you will realize that the debts of your youth were indeed small potatoes.

How do you get this elusive financial skill? If you’re still in debt, you get it by getting much more bold about wiping it out. Sure, you can do it slowly, just as you can lose 100 pounds by lifting a 5-pound dumbell a few times each day while you sit on the couch and watch Oprah. But I recommend the more efficient path: put on your walking shoes and start walking as much as you can. Eight hours a day. Go straight to the most healthy and balanced eating regime and never deviate. Stay on it and let the forward progress accelerate your progress each day. Consumer debt and excessive amounts of body fat are virtually identical.

The more vigorous method has multiple exponential benefits: every dollar of debt you pay off creates a compounding snowball of savings that continue for a lifetime. And every dollar you manage not to waste, builds your skill at saving money and learning to spend it more efficiently. These skills stick with you for life as well.

So if you still have a car loan, credit card, department store or even a student loan debt, you should destroy that as a prerequisite to beginning the more relaxed stage of saving for financial independence. At the later stages, you can start to take it easy, but right now is the time for some hard work. Depending on your life situation, you might decide to go car-free, live with roommates, eat a vegetarian diet, take on extra jobs, delay parenthood, enjoy only local travel, and do any number of other things to get the job done. This stage will be short and effective.

Then I’ll see you at the next stage, which is really where this more advanced blog begins.

Further Reading: one man’s description of what it feels like to escape from over $100k of student loan debt in less than a year – by treating it like an emergency and applying some real effort to it:

I had a similar experience with loaning money to a family member to pay tuition. Since this money management stuff is so ingrained in me, it’s hard for me to realize that other people don’t think like me. When I proceeded to watch my family member pay for trips to amusement parks, restaurants, expensive cell phone plans, unnecessary road trips…it was hard for me. I wanted to punch the family member in the face because my hard earned dollars which were supposed to be financing this “need” of tuition were really just indirectly financing a wasteful lifestyle. 5 years later, the loan remains unpaid, and feelings of frustration remain.

Another good friend/colleague of mine back when I was an engineer was struggling with credit card debt. I wanted so badly to help him out and buy it off, in exchange for a modest interest payment…just to give him a fresh start on life. Finances I think were a big source of depression for him, so it was a big temptation. I tried counselling him instead, but he continued to make extravagant purchases such as $30 giant omlettes which he called a “good deal” because they had 6 eggs (at a true cost of $0.50).

Another story comes to mind. While I was pursuing a masters degree, one of my classmates approached me and said “you know…this credit card debt is really stressing me out and I need to figure a way out of it.” When I found out in the proceeding sentences that he had just bought his wife a new iPad2 (financed by credit card), I had to literally bite my tongue to not laugh out loud at the absurdity of his conundrum.

I learned two important lessons here: 1.) Never loan money to someone who is less frugal than you (which for me is practically nobody) or it will drive you to an insane asylum. More money doesn’t solve money problems….it only augments them! 2.) Some people just don’t get it….and never will despite your best efforts. Some people were not born with the financial gene, and as a result, are doomed to a life of 50 hour work weeks until they turn 90 and die in their cubicle. This actually happened at my last job. People died of old age on the job. It’s also sad when people don’t show up to work because they died over the weekend of old age.

Had to chuckle, as I look over at a banqet order currently on my desk:

“Continental Breakfast Buffet:
Selection of Juice (orange and cran, not necessarily fresh)
Sliced Fresh Seasonal Fruit and Berries (i think they mean not quite ripe canteloupe, honeydew, and bland watermelon with a few blueberries scattered on the tray)
Selection of Freshly Baked Breakfast Pastries (nasty dry croissants and danishes)
Freshly Brewed Coffee, Decaf, and Herbal Tea (that will be sitting in an urn over a flame for an hour before you arrive and have the consistency of tar… and the tea is Lipton and Celestial Seasons teabags)

I liked your quote, “More money doesn’t solve money problems….it only augments them!” because it reminds me of one of my mantras. Namely, “If money solves your problem, then it’s not a very big problem.” I think Big Problems are physical and mental illness, trauma, death of a loved one and grief that follows and money doesn’t fix these things.

I agree with you and don’t lend money to family and friends. Also, I only occasionally tend to donate time to an organizations and charities, but not my money because they are much more wasteful than I am.

True, sort of. At this point we’ve cut our expenses as far as we are able to given the local COL, kids still at home and 2+yrs left on the mortgage. We’re surrently saving about 45%. More money wouldn’t change our daily lives in any way, but it would certainly shorten the time to financial independence. At this point everything is on autopilot, we’ve done the hard work of cutting expenses and reducing what can’t be cut entirely. We save everything we can and now just have to put in the required number of months/years to hit our number$. More income would just increase the savings, and which would make me happy. Does that count as more money making me happier?

Sometimes even illness can be solved with enough money. Ask my husband’s cat…
We took him to the vet, to see what is wrong with him. Two days and ~600$ later (it is a very expensive cat, considering he is street-breed), we found the heart problem and got prescription for pills to take for the rest of his (hopefully long) life.
See? Like my mother always says: Problems that could be solved with money, aren’t really problems.

BTW, I never lend money I want to see again to friends I want to see again. If I can give one of these up – no problem.

I like your comment about giving time to charities rather than money. You seldom find a person or organization that will be careful with OPM (other people’s money).

Here’s one for the books. A sibling needed money to keep a roof over her family’s heads during the winter, so I made the loan. Later, I learned that half of the money was used for mammary enhancement. Needless to say, the loan was not repaid. I’m not in the loan business anymore.

@baughman
Thanks for the great comments. I’m out about $60,000 to my 4 kids in total, over the years (I’m 62). One has paid me back completely, the other three do NOT have the frugal gene. I’ve made peace with this, it was my fault as much as theirs.

not lending money to people who are “un-frugal” is great advice. It is difficult to do sometimes, probably very difficult with family, but when someone manages to amass more debt than they know how to deal with, and then you ‘help’ by consolidating that debt into a low or no interest amount.. pretty soon those cards are creeping up again, and paying you back is less important than the scary credit people.

Really, it’s better to not lend money to family, unless you can afford to do without it ever being paid back. The risk of a rift is too great otherwise.

My parents helped us with our house down payment, but (a) they know we’re good for it, and (b) they won’t go broke if we flake out. You have to have both (a) and (b) for this to be an acceptable proposition; just (a) is not sufficient.

I actually do think there are some cases where loaning money, even to people less frugal than me. For example, when my brother was stuck because he couldn’t afford to pay first and last month’s rent to move closer to his job to a place that was cheaper and wouldn’t require a car, a loan of first and last month’s rent (or to subsidize whatever part he couldn’t afford) could make a difference. (I’m not sure–I didn’t think to offer a loan for that until it was too late.)

But I agree, when my sister asked for money because she was going to get evicted, but it was because she couldn’t afford the rent and had no plans in the future for affording the rent, that’s just throwing money in the trash. She extended the time before eviction by getting money from various other places, but she was still evicted. Now she lives somewhere she can afford.

Loaned my brother $2000 (against my better judgement) five years ago and have yet to see a penny of it, while he continues to live high on the hog. (God, what memory of my grandmother did that come from!?). Loaned a friend $1200 for a mortgage payment, four years ago; have yet to see a penny of it. Lesson learned, and probably cheaper than a lot of life lessons. My blessed husband has never mentioned either mistake once…Now I give money to no one for no reason. Hard-hearted? Yes, but the resentment of watching people not pay their debt to me when they had the funds was eating me up, so now I avoid the problem by not lending anything.

I can completely relate to you, Mr. Baughman. It’s all the worse when it’s a family member. My parents are constantly fretting about their debt. They have several credit cards, vehicle loans, and a large mortgage. A couple of years ago they refinanced all of their debt into a consolidated mortgage with a lower interest rate. At first, I thought this might be a step in the right direction. But then they kept right on using their credit cards building up new balances in addition to everything that had just been consolidated. They even financed a new tracker ($12k), a new SUV ((20k), and a long-arm sewing machine ($7k)! I try to be a voice of reason, but there is always an excuse. As long as they can make the minimum payment, they don’t mind piling more on.

They are in their late 50’s and still have a long way to go before retirement, assuming they will ever retire. I love them dearly and want to help them. But it would be even more irresponsible for me to halt progress toward my own financial freedom and risk letting their poor choices pull me under too. It’s frustrating. All I can do is watch.

If your lifestyle matches or, god forbid exceeds, your income you are no more than a gilded slave.

Without F-you Money you are a slave. If you have debt, you are a slave with still stouter shackles.

You weren’t born to be a slave.

Carrying debt is as appealing as being covered with leeches, and has much the same effect. The idea that many, indeed most, people seem to happily cover themselves with debt is so beyond my understanding it is hard to imagine how, let alone why, the downsides would need be explained.

Take out your sharpest knife and start scraping the little blood-suckers off.

beyond that, since I have absolutely no experience with consumer debt, I’ve yet to offer a post on the subject. Been thinking about it but maybe now when the topic comes up I’ll just link to yours here. Nice job!

Thanks for the punch in the face! For us, it’s just an underwater mortgage, but the freedom of having some equity is a goal. Last year, we had a couple of “emergencies”: a $3,000 transmission for the car and a $3,500 heat pump replacement (needed in the south where we live), and cancelled a vacation and stopped all eating out until we had the money saved up to pay for both. We paid for both on credit, because the URGENT, YOU HAVE TO PAY THIS THE FUCK OFF is more motivating for recouping the expenses than the pansy “oh well, now we should start putting 250/month back into the emergency fund to build it back up” method of laziness. 2 months later and we’d paid off the $6.5k on $5k/month take home.

I loved the comments of family members who offered to “loan” us the money so we could still go on vacation!

And thanks for the shout out to NMHD; I love his site. I actually found your site via his…and was referred to him by none other than…Ramit. Whole fuckin’ circle.

Nice post! The point you made about learning fiscal responsibility as a 10 year old child (Wow, you probably already knew this before you acquired your facial hair!) was especially important, MMM. Having this trait allows one to advance much faster than those who don’t learn these lessons early on. We watch our parents spending and saving patterns and think that this is the norm.

Learning this type of restraint also helps in ways other than with finance. We learn not to eat or sleep too much, not to work to much, not to play and party too much and we learn not to feel deprived while we are carefully using the resources we do have.

My dad knew that I had a pile of “unironed” cash in my drawer at 12 (I offered to lend him some of my baby sitting money) and had me open up a checking account. Then we went out and bought my first share of stock, Disney! I was FI at 36 and am really thankful for both of my responsible parents (who have been FI for years)!

The impression I got from the Harvard Guy is that he isn’t planning on continuing his frugal ways now that he’s paid off his debt (which he paid off in large part by liquidating his retirement savings). He’s expressed a huge fondness for “bottle service” at upscale bars and other expensive hobbies.

Not Mustachian by a long shot, IMO. My prediction is that he’ll be back in serious debt in 5 years.

Whoa!! You’re totally wrong on that, and suspect your comment would be pretty insulting to NMHD after all he’s written to the contrary.

First of all, if you search his site for “Bottle Service”, you’ll see that he uses it mainly as an example of a wasteful indulgence. Secondly, he repeatedly states that he LIKES the new frugality – while he may be loosening things up a bit now that the debt is gone, he’s not about to go out and re-purchase the Nissan Murano and the motorbike. Much as I now live in a balance between freewheeling cash spending and still enjoying an efficient lifestyle.

Secondly, transferring the retirement savings to the higher yield of the student debt payoff was only one part of it. Cutting monthly spending by over $3k/month, plus the bit about roommates and selling extra cars, and choosing to save rather than spend his raises and bonuses were much more important – especially when you track the effect of these new habits over several years instead of just seven months.

As for the prediction of returning to serious debt within 5 years.. That’s a wager I’d gladly take the other side of!

The reason I’m attacking your comment like this is that the comment itself runs against the spirit of this blog. When somebody does something worthwhile, you celebrate it and use it as an example for others. To shoot it down without even reading and understanding all the posts is negative Antimustachian Complainypantsing at its purest.

Haha! Thank you, Mustachio Man. I relished every word of your rebuttal. I’ve been student-debt free for almost three weeks now and I’ve achieved a decent cash cushion that would technically permit me to spend more freely, but I can’t. I still can’t bring myself to pay for a dinner date and I can’t bear to leave my flask at home when I head to the bars with friends. I bought some gravel for my yard two weeks ago as part of a zeroscaping redesign that will save me money in the long run, but I’m still suffering from buyer’s remorse. I haven’t yet replaced my shoes that have a hole in them or taken care of other deferred expenses. I continue to track every single one of my expenses and set goals.

My frugal nature has become habit; the lifestyle ingrained.

Thanks, MMM, for the link to my site–traffic is off the hook. I hope everyone’s enjoying it. Best of luck to y’all.

I was a big fan of the Secret Booze Flask in my barhopping days as well. I even made a culture out of it among friends – it was called the “Drink Booster Program” (DBP for short), and part of the challenge was to do high-drama booze pours – boosting your drink in public without being secretive.. while the others might discreetly chant “DBP! DBP!”

But my favorite moment in the program was one evening walking down the boardwalk in Waikiki at sunset, heading to a bar with some friends. Suddenly I reached up and instinctively caught a 12oz mini bottle of vodka which had come flying at me out of nowhere, followed by two others aimed at two nearby friends.

We identified the source of the projectiles – a new inductee to the DBP had taken the initiative to run ahead into one of those ABC variety stores and stock us all up before we got to our destination. “DBP, Boys…let’s go!”.

NIIIIIICE! I am totally feeling that. I did a high pour on Saturday–unscrewed the cap on the flask and poured it into my Sprite from about two and a half feet above the glass. The jaws on a couple of girls nearby dropped. AWESOME.

I’m 52 and I’ve never carried credit card debt. The only debt I ever had was for the first couple of cars that I bought and my home. Now I have no debt.

I think I learned most of this Debt Aversion from my parents. They never even had a credit card. They had a Sears and JC Penny store charge cards and that was it. Debt Aversion is one of the greatest gifts my parents ever gave me.

I’ve always been surprised/horrified/disgusted by people that seem to live beyond their means as signified by credit card debt. I just don’t understand how they sleep at night – I know that I couldn’t.

Maybe Mustachians are just wired differently than the average consumer?

P.S. MMM – I never felt the need to iron my money, but I did occasionally accidently leave money in my pocket and launder my money. :)

Nope, looks like at least 3 of us LOL
Instead of photo album I used small box that was hand decorated with beads.
Hey, I am a girl after all … Sometimes I still have an urge to clean and iron some dollar bills, please do not tell my husband, he will flip out. LOL

Super late to this party (reading through the posts from the beginning), but I thought I should contribute my odd early stash location:
From pre-k to maybe 1st or second grade, I put all the money I earned into the keep of a cardboard castle I made in school (the pre-K lemonade stand money had been somewhere else I don’t remember up until I built the castle in our medieval times unit.in kindergarten).
The odd thing is I forgot about it at some point during grade school after I started a second stash in a wallet that my Granddad gave me.
When I found the castle stash sometime in high school, it wasn’t more than I could earn in a day or two of mowing lawns or construction site work, but I can’t pretend I’m not still proud that I had amassed something over $200 in my castle before maybe 3rd grade.

MMM, I enjoy your blog so much I have to pace myself while reading new posts in order to savour it…

I have friends around me that are waaaay impressed that we pay more than our ‘normal’ required monthly payments on the mortgage. We just bought the house less than a year ago, and we managed to pay down 10% of the mortgage. Nothing spectacular, yet stil a good lump of money. And I keep telling them, if you can’t put capital on the house now with such low interest rates, what are you gonna do when the rates go up? Take another 30 year mortgage? Come on! The point is to own a house, not rent it from the bank…

Now credit card debt… that’s another level. If I ever received a credit card bill I could not pay down, I would go into crazy frugal mode instantly. Probably eat canned goods for a couple of weeks/months, depending on the debt. However, sometimes things come up in a close time frame – car breaks down, property taxes are due, house repair all happening at the same time… That sucks. That’s why there are credit lines – I never used mine since college… Also, a little cash flow flexibility usually does the trick. Anyways, credit card debt, seriously?

What ghyspran said, at least for kidney beans. I once substituted white kidney beans for fava beans in a felafel recipe (which involved grinding soaked raw beans, then frying balls of the mush). Imagine the movie Speed with a porcelain bus…

Well put, sir. Sometimes I forget that not everyone has the same aversion to debt as my wife and I do. Paying cash for a Master’s degree, saving/investing for the future and paying off extra mortgage principal every month are just way more important to us than driving an expensive car, buying the latest iGadget or going out to eat 5 nights a week. I know MMM preaches to the choir a lot here, but it still feels good to be amongst like-minded company.

Sadly, I can tell you that youth moustache can be lost. When I was 10, I was such a voracious saver that my mom and my neighbours would borrow money from me constantly. I only ever wanted cash for gifts, I had jobs since I was 11 (not chores, actual jobs like flier delivery etc)…

Then married life came, and somehow I got sucked into the consumerist society, credit cards etc. Before I knew it, I had more than years worth of salary in credit cards alone, plus car payment etc. Finally, I realized how dumb I was, so before I ever missed a single payment, I went to the “credit consulting” place (what a waste!). Since I realized that will not help me get out of debt in any reasonable time, I went towards bankruptcy. I settled with the companies that loaned me the money by agreeing to pay about 70% of the debt over 5 years (no interest would continue). It was hard, but I managed to do so in less than 4 years and was debt free. During this time, we drove cheapest card around (no, biking is not an option here), we sat on the broken sofa and watched over-the-air free TV on the old style TV…

Funny story – once we paid off the debt and now are able to afford anything, we are still driving 12 year old cars, sofa is still crap and we still do not have cable TV.

Still, getting out of the debt was the best thing ever – I was able to walk into my boss’s office and demand huge raise (as I could afford to lose my job), my wife retired at 35 so that we can have kids and she can raise them herself), and last week I started moving towards my own business (work is my hobby).

I agree with MMM – if you have any debt, there is no excuse for doing anything but paying it off. You should downgrade your accommodations to the one level up from a tent, sell the big cars, cut the cable, cell phone bills… Feed at the value grocery stores and only with what’s on special and for the time being, eating out means your back porch or a picnic.

My favourite (laughable) comment from my good friend about student loan debt is “well it took me four years to rack it up, of course it will take me longer than than to pay it back”. His comment was in response to me turning down going on a golf trip with him and some buddies as I told him I was going to put my money towards my student debt instead.

In the end, I spent 7 years in Uni and paid off my student debt in 14 months after graduating. My friend who spent 4 years in school is still working on his student loans 6 years later (and think he has also rang up a LOC debt to pay off his credit cards).

Hah, hopefully you’ll get a laugh out of this. I was always puzzled by the fact that other people my age (I’m in my upper twenties now) always seemed to have a more expensive and trendier wardrobe than me, always had money to spend at the bar, and could afford expensive cars and igadgets and ski trips to Colorado. Where was all this money coming from, since they were still going to school and didn’t have a trust fund? I was so CONFUSED :-/

It took me four years to realize that these people were all racking up credit card debt. I had no idea that there were plenty of people who didn’t pay their monthly credit card balance off in full, or who used their student loans to pay for vacations and shopping sprees. It is no less absurd to me, but at least it is not so mystifying anymore…

Totally relate to this. At my first job out of college, I actually had a few nightmares about my peers earning a larger salary than me because I couldn’t figure out how they were able to spend as they did (combo of credit card and their parents kicking in, I later learned).

YES! THIS! Talk to your kids alot while they are growing up. I had the same problem. Little concept of money, how much people made, and how they spent what they had.

Parents and I talked but we didn’t always do a good job of communicating. I made alot of mistakes b/c of the lessons not learned – my fault. I also learned alot from those mistakes – and for me at times – that was the only way I’d ever get smarter.

Talk to your kids about money and life choices (choosing a spouse, starting a family, career, etc). My wife and I have done really great on the choice in spouses and raising the family so far. We’re old fashioned on some topics I suppose. Money? Not as successful immediately. I put some of the blame on the slow economy. We’re past all that now.

I know exactly what you mean. I could never understand how my co-workers and peers had such nice homes and cars, vacations, the latest gadgets. I couldln’t figure out what I was doing wrong – thought I was either underpaid, or they were managing their money much better than I. I finally realized they were living way beyond their means.

I only realized in the last few years that you COULD carry a balance on your credit card. I asked someone why the limit on my credit card was $6000, because how could anyone possibly spend that much money in one month? They had to explain to me that you were allowed to carry a balance on your credit card.

It’s funny that the world makes us feel crazy for not carrying a balance when clearly it’s the only reasonable way to use a credit card.
As you point out, we should be suspicious when the credit card limit is more than one months’ net salary.
Already, you have to know somebody is up to something fishy.

While I understand the psychological aversion, it’s not always irrational from a purely economic standpoint to carry some debt under controlled circumstances.

For example, I have a 4.0% fixed rate 30-year mortgage on my primary residence. The loan is less than 40% of the house’s value so I have no concern about being underwater even if/when the market tanks. I see no reason to pay it off ahead of schedule, although I certainly could, since even in the mediocre market since 2000 I’ve been averaging 4.7%+ CAGR on my investments, and I don’t expect inflation (and market returns) to stay this low for the entire remainder of the mortgage term. I also have a disproportionately large share of my assets in real estate since I live in an expensive area and have a (profitable) rental property, so I prefer to have some diversification.

For those of us without a ton of property assets though I would argue paying off the house isn’t a bad idea. Sure, you could invest the money rather than paying off the debt but having a roof over one’s head when the economy tanks isn’t a bad thing.

It seems like we all learn this lesson about lending money the hard way. I guess the point is that the reason the person that needs the money got there is because they didn’t prioritize paying debt off.

We have a renter in our duplex and we reduced the rent for a few months because he was having difficulty with some bills. I’ll never do that again. He bought a used car and continued with the mega cable package while we biked to work and cancelled cable. Four years later, he is just about paid back up.

Whenever I owe someone money on a personal level, I have a vague sense of a giant flashing red negative number over my head.
“Bob! -$10!”
Since the flashing red number is visible to everyone around me, it would be as embarrassing to go to a Nonsense Store and purchase a Flashy Consumable Item as it would be to be a vomit-covered drunk who found a $20 bill and immediately heads to the liquor store.
The odd thing is that my parents never felt the need to tell us about the importance of buying things with money you have rather than money you hope to have later. They just did things the proper way and it rubbed off on us.
Raising children today, though, I feel it’s necessary to explain to my kids how to buy and not buy things. The people who market credit cards are much more clever than they were 30 years ago.

Ahh.. But did it rub off an ALL the frugal toque siblings? I think I’ve heard stories that indicate otherwise :-)

I wonder if monetary responsibility is a combination of genetic predisposition, parental example, and peers and cultural learning later in life. Here at MMM, we’re working on the last of these factors – changing the entire culture!

For sure. My dad was very financially responsible and it rubbed off on me and many of my sisters. But I’ve got one sister and one brother who are spenders. Much of it is their friends and who they are married to.

I also wonder these things – would love to see a post from MMM or guest on any real studies behind the psychology of savers. I also agree it has to be a wide combination of factors, and it IS possible to change later in life (for worse or better)

I think it’s important to keep in mind that people who grew up in non-Mustachian environments have real barriers to overcome to “see the light” – no excuses, but barriers. It is a HUGE perspective shift to undergo, coming from someone who’s gone through it (and still considers it one of the most influential events in my life). There’s no one magical way that will work for everyone to change their way of thinking – like addiction, everyone’s rock bottom is different!

Also I would love to see someone come up with a “How Mustachian are you?” survey/grade so people can really see where they stand. Like, +10 if you are completely debt free, +5 if you only have a mortgage, +3 if you only have student loans under 20k, 0 if you have student loans over 20k, -3 if you have car loan, etc. (there could be LOTS of measurements!)

For sure. There are a lot of factors. People raised in the same household can become massive credit-card overspenders or frugal penny pinchers without any apparent regard for age, economic situations during childhood or any such thing.
I used to believe that kids raised in single parent households came out magically responsible with debt and frugal with spending, but I’ve seen enough cases now to show that this is no panacea either.
It’s something that has to be intentionally taught. Without forethought, your kids might go either way.

My family is a good case in point. My father worked at a large microchip manufacturer making good money, probably around $70k a year back starting in the 80’s to 90’s. My life growing up included phrases that made me believe that checks are made out of rubber (they bounce, or had the possibility of bouncing) and that eating out with a family of 7 was at least a once a week occurrence.

Checks have fallen out of fashion these days, but back then a common “trick” my parents would do was to go to the grocery store, each grab a 12 pack of Diet Coke, head to separate check out stands and write checks for $20 over. With the $40 we would then go to McDonalds and all get a happy meal. As we got older they would have to go to multiple stores so we could all get the #2 super sized. Any windfall was immediately celebrated in like fashion.

Somehow through all of this I came out as the black sheep of the family. At an early age I realized that I could save whatever money came my way in order to purchase things later that I wanted. When given $10 for lunch I would get something around $3 and pocket the rest.

We grew up on and off of food stamps, free lunch programs, and eventually reduced lunch as some of us got older. We shopped K-Mart and Good Will for clothing due to not having enough money. My father commuted 50 miles each way to work 4 days a week and put in every over time hour he could. Despite all this by the time I graduated high school they had lost their cars and their house, and continued to spend on storage units and eating out while complaining about not having enough money. They eventually divorced due to the mishandling of finances.

Luckily I was unable to get a credit card until my frugality muscles were well developed. Against my friends advice I never run a balance on my card that ever incurs interest, I always pay it off. I’ve had enough money to live in a foreign country, move there, move back again some 6 years later, buy a car when I got back in cash (although had a been a bit more Mustachian then I would have opted for a more efficient vehicle, but 32mgp while doing some basic hypermiling isn’t too bad when compounded with the fact I use less than one tank a month), and spend another couple grand on furnishing, including washer and dryer (dryer is rarely used now).

A year and a half after the move here I had enough for a 10% down payment and bought a house close to work and now bike. My net worth is around $63k and growing roughly $24k a year. Like other posters here I have lent money to friends and cringed as I saw them continue to indulge in luxuries and consumer spending. My family all still live paycheck to paycheck, one makes minimum wage and bought a car to drive to work which is half a mile down the street.

My father now is much better off, but he still spends every cent he earns on things he likes, but no longer plays the bouncing check game, or using credit cards, only debit cards. He’s been a great example to me of someone who never complained about hard work, even while working three jobs, two on top of his nice salary one, to continue and provide for his family.

Despite all the lack of frugality, and the rampant spending of money in my childhood I came out with an utter distaste for running a debt. My biggest memory of watching Little House on the Prairie was Mr. Ingles insistence of “paying cash on the barrel”.

“Then I’ll see you at the next stage, which is really where this more advanced blog begins.”

I spend my limited blog/forum time for that very reason. I’ve been done with the CC debt for many years, working on wiping out student loan debt this year, I’m not interested in someone baby talking their way toward suggesting modest changes that have limited results. I want someone to kick my ass and remind me to be badass, and this is the only place I’ve found to get it. That is why I’m here. That is what makes you a unique and valuable commodity.

Yes MMM is a kick your ass punch you in the face blogger. I think we are all OK with that. If I had my weight loss to do over again (I’m down 70 pounds) I secretly fantasized about having Jillian Michaels of Biggest Loser fame being my personal trainer and kicking my ass every hour of every day. “Do NOT eat that thing or I will kick your ass!” “Do NOT hang onto the treadmill rails or I will be in your FACE right now!”

A question: why not encourage paying off a mortgage too? (We have no debt other than our four properties – one we live in, three apt buildings. Our emergency funds are $50k plus. Our investment accounts are plugging along…blahblah…) Just curious. Is it b/c the thought of paying off that amount is too much? or b/c of the tax write-offs? or? I did a little investigating a while back and concluded that paying off one of our properties is a better investment for us, than other options. I don’t mind losing the tax write-offs b/c our income goes down as we work less. We don’t want more properties, b/c managing three is enough. Anyway, why not include it?
Also…as an aside…you have got me walking to work! Seriously! I’m doing it!

Tax write offs….let’s see. If you spend 10,000 in interest on the mortgage (to pluck a nice round number out of the air) to “save” 2,800 in taxes by being able to write off said 10,000 from the gross…….

Net……-10,000 interest paid to the bank + 2,800 tax “savings” from the feds = -7,200.employees leaving your pocket each and every year.

I second what Emmers says. My favourite: “My marginal rate is 39%, therefore I pay 39% on every dollar I earn… I avoid earning extra money because it’ll put me in a higher tax bracket and I’ll lose money on the deal!”
Although given that this is an advanced blog, perhaps such stuff is too far beneath us…

I’m taking on a mortgage (I can own a house fully in <20 years, or I can rent another 30 years and save at the same rate I am now and own the same house after inflation.)…

And I'm probably going to treat it as pretty urgent debt for a while. I think we could pay it off in 5 years. Credit cards would have me joining the "free food on campus" group at my work for all my meals.

Nice. Yeah, there are plenty of beginner blogs that deal with credit card debts. That’s just the first baby step toward being financially independent.
Why do you have that 15 mpg Ford F150 if you owe so much credit card debt?
I still have mortgage debts and those are painful even if they are low interest.

I’ve only lent money on two occasions ($600 and $10K) to my best friend and to my brother. I was fully paid back as agreed both times, but I don’t plan on ever doing it again. A joint real estate venture with my father, however, went terribly bad fast.

When wanting to help out a family member or, friend, I like Bill Cosby’s advice.

Don’t loan money. Give the money as a gift.

Money mixed with personal relationships are not good business. Nor, are
they good relationship builders. Your once “equal” friend/family member
has now become a debtor to you. You will look at them with different eyes.
They will see you differently too.

If you are being asked for money and, don’t want to gift it, simply say no.
There was a time many years ago my younger brother showed up at my
house asking for 10 bucks. I gave it. A few weeks later he came to the
door asking for 10 bucks. I emptied my piggy bank and, gave it to him in
change. A few weeks later, he came to my door asking for 10 bucks. I told
him I didn’t have 10 bucks but, if I did, I would like to spend it myself.
He never asked for money again.

It has been shown, with research I gave send you if you like, that making large sweeping changes does not work long term and those habits will not be formed. It is better to start slowly and work your way up. Cut down cable, then 6 months later, cut out cable. Cut down one meal out , then another, and another. Then, start working on grocery meals etc. Someone who takes a year to get to the point you think they should start off with and keeps it up until the debt is gone will be better off than a person who starts like you think they should and stops it after 3-6 months. That is why yoyo dieting does not work. I understand that you never had to work your way up, but that means you may not understand the best way to do so.

I think that the opposite can easily be true too. When I do things gradually I tend to fall off of the wagon because the change I seek is happening too slowly.

I hate going to work NOW. I want to be able to do things on my terms AS SOON AS POSSIBLE. For me this blog and others have been a wake-up call to action and I am going in with both feet as fast as I can. To do it gradually just invites exceptions to creep in and focus to be lost for me.

I think it depends on the amount and type of debt. A person who is “just getting by” without accumulating serious debt would likely benefit from a gradual approach.

However, a person who is $10k, $50, or more in debt is a like a person who just had a quadruple bypass. Gradually cutting back on bacon intake over the course of a few years isn’t going to make a difference. In these cases, rapid changes are needed because as MMM says, it’s an emergency.

I know this post is almost three years old, but I’d love to see that research. It seems to me if we could devise some device to distinguish these two types (who are helped by extreme, cold turkey measures; who instead need gradual changes) we could tailor interventions in a way that would be truly helpful.

I find that this is a personality thing, a lot like Ginger said above. Meaning, large sweeping changes versus smaller incremental changes.

I liken it to weight loss, because I have experience with that. I gained 50-60 lbs gradually over several years, though the first 30 lbs came on fast. I tried for a long time to lose it. It wasn’t until I went all ninja on my diet (I was already exercising) that I was able to lose the weight. And that trend has continued. When I lost the baby weight, it was the same. I had to sit down, count calories RELIGIOUSLY with weight watchers, take zero money with me to work so I wouldn’t be tempted by the vending machine, stop eating out completely, stop drinking wine completely.

Only after making those drastic changes and having them be “habit” after 2-3 months could I relax a tiny bit and incorporate an occasional meal out or glass of wine, and by then, I was no longer overweight. Kind of like the Biggest Loser (to get an example from bad reality TV). Those people only are able to lose weight by completely changing their lifestyle upside down.

So when it comes to debt reduction, I would say that’s probably my personality also (though our only debt is our house). Big, bold changes.

However, a lot of people have to do the small, incremental changes, or they will give up. I know many others who try the drastic process, and fail, and that’s it. I have a friend who is a dietitian who helps people with weight loss using the small steps process and it’s amazingly effective for some people (not me). I have a friend who lost 30 lbs with small, incremental changes. It took him 2 years to do it but he didn’t feel deprived at all, and it all started with cutting back from 2 cups of rice at lunch to 1.5 cups. Then from 1 glass of wine/day to 1/2 glass per day.

Of course, success in small changes makes you more confident and able to accelerate the changes or make them bolder.

Wait, so… I have some sort of investment account currently worth $17,000, started for me by my parents in better times (I don’t think I even knew about it until I was 24 – I’m now 27. I don’t know what kind of account it is, beyond “securities market,” or whether money can be taken out of it, but I’m trying to determine that now). I don’t have any credit card debt, but I do have about $10,000 of student loan debt left to pay off from undergrad, which will cost me $14,000 on my current payment plan. Would you advise taking this money and using it to pay off my student loan debt immediately? That seems like the obvious thing to do, but it seems like my parents would have thought of that and mentioned it if it were.

Do you have other reading you’d recommend on these kinds of decisions? Sorry to be such a noob.

I think you know the answer to this… Of course you pay off the student loan. You are looking at a known money sink (debt interest) versus an unknown potential gain (securities.) Also, you are 27… It’s time to take control of your finances.

Why is it going to cost you $14,000 to pay off your debt? It would take 10 years at 4% to add another $4,000 to your debt. 10 years is way too long for a debt of this size. Although paying interest is not good, I think you need to take another look at your repayment plan rather than dip into existing savings. You will appreciate paying this off more if you do it yourself.

At payments of $500/month you would be able to have this debt paid off in less than two years and minimize your interest costs. Once paid off I would recommend switching that monthly payment to putting it towards a retirement account or saving for a house down payment.

Sorry, I should have been clearer – it’s $14,000 on my current payment plan, which is the default Sallie Mae assigned to me when I graduated in 2006 – payments of about $110 a month (now stretching until 2023, because I deferred payment for several years while I was in grad school). If I decide not to use my savings to pay it all off at once, I could certainly change this payment plan significantly. (Although interestingly, on the Sallie Mae website, they only give you an easy link for decreasing your monthly payment, not for increasing it. Thanks, guys.)

In that case, I would definitely recommend paying down the debt yourself as you will get a much greater appreciation for taking responsibility for your finances. I would suggest that you start by creating a monthly budget and figuring out how much you can put towards debt repayment. Most people on this blog would recommend paying it down as aggressively as possible and setting high monthly payments. If you set a frugal budget with high monthly payments you should have that debt paid off in no time and keep your interest costs to a minimum. You may also want to review the loan and make sure that your are paying a reasonable interest rate.

I was able to pay off my $35,000 student debt in 13 months. My budget was very tight and I had to be frugal but by the time I had it paid off I had a much greater appreciation for the amount of work it takes to get out of debt and pay for the things that I want.

Thanks for your advice! In case anyone is curious, it turns out my investment account is a Roth IRA, so I can take out the principal with no penalties but would have to pay a bunch of tax if I took out any of the earnings.

Paying off $35,000 in 13 months is awesome. Congratulations! I only make $45K pre-tax… but maybe I can pay this whole thing off this year.

bogartApril 18, 2012, 8:53 pm

@Leslie I won’t claim to be fully Mustachian and may get blasted for saying this, but I for one would not take money out of a Roth lightly (e.g. to pay off a loan that is at a “reasonable” interest rate, where <5% is clearly reasonable and anything 5-10% probably merits some mulling and anything over 10 may not merit mulling at all, but I really have no idea, not having ever if my life to date had debt at that rate.). The tax advantages of Roths appeal to me a lot (and basically, the younger you are — and you are noticeably younger than me), the more valuable those should be (the longer your investment and its earnings have time to compound), and, though there are some loopholes (e.g. converting other IRAs to Roths, if you have other IRAs), you can only contribute $5K per year outright to a Roth.

Were I you, I'd check the interest rate on that debt, and possibly talk to a professional financial advisor, before touching the Roth. Once you've done that, you can't undo it. I'd also, of course, recommend exploring other Mustachian options (cutting costs), rather than touching the Roth.

cdubApril 19, 2012, 9:49 am

I just read that it is a Roth IRA. Yeah, definitely don’t touch that. As for my 27 year old comment. I guess that came out wrong. I have an 18 year old who graduates high school next month. He can’t wait for “freedom” as he calls it. I guess I just can’t fathom someone your age actually giving a care what their parents think about their finances. That said, it sounds like they did a nice thing for you with that ROTH! Keep it, pay down your debt and keep learning!

As a whole, I try not to remove my debt payments from my retirement savings. Many people consider doing something similar to pay for their children’s tuition – but the retirement count marches on. You can alter and extend your loans; retimrement accounts not as well.

How long would it take you to pay off living frugally or becoming a Master Mustache?

Even though me and my wife have no debt except our mortgage, I think the same hardcore attitude can be applied even after you’re out of debt.

I noticed that there is a comfortable neutral area that is tempting to fall into, its the zone between having only mortgage debt as your only debt and not yet reaching early retirement.

Even though we’re doing ok with about 150k in savings total and steady dividend income, this reminds me that we need to kick it up a notch and start building the stash up more to get to that next level. I think I am getting too complacent.

It seems its even better if you can take that same drive and apply it even after you’re out of debt to get to early retirement.

I agree that debt should be considered an emergency. I’d like to add that it only crosses the line into ‘Emergency’ territory when the interest you’re paying on it is higher than the return you can logically expect from investing the money, in my opinion.

For example, I have a loan with my parents left over from school. I pay zero interest on this loan. I recently finished paying off my government student loan (after putting a concerted effort at it for a year, although only a fraction of what No More Harvard Debt did!).

Now, while I am paying of the loan to my parents, I am also putting a larger effort towards investments that will return 4-6% over time.

Looks like she has also knocked off her debt in a NMHD type of way – by going all out. I love these stories! The most interesting thing is what people learn through this experience and how much of that badassity they decide to keep for the rest of their lives.

Mr. Stache, I would be interested in your view of debt for those of us who are comfortable and could easily extinguish such liabilities if we wished. For example, the working stiff who has no immediate plans to retire, is in a 30+% marginal tax bracket and owns a home with a 200k mortgage at 3%: would you suggest that this person hurry up to pay off the loan? This becomes an investment./trading decision more than anything else, I would suggest.

If you run your 2011 tax filing numbers with and without the mortgage interest deduction, you’ll see what makes the most sense for your specific situation.

I saved thousands of dollars with the mortgage interest deduction this year. Down the road I will accelerate mortgage payments but for now those extra little green employees are going into my investment portfolio.

MMM, so glad you posted this primer. I’m still amazed at the number of people who take the time and effort to read this blog yet stupidly continue to pay on cars they don’t own outright and cable tv that is a total waste of funds … and eating out and going to movies/bars …. and buying expensive clothes vs Target/thrift/eBay…. the list goes on and on… Good god.

“I saved thousands of dollars [on the taxes I paid to the Federal Govt] with the mortgage interest deduction this year.”

At the cost of ~3.6x that in interest.

Look at the TOTAL cost – the TOTAL outflow of dollars. You pay 10,000 in interest to the bank to save ~2800 in taxes paid to the Govt. How again is paying 10,000 to one shyster to save 2800 in taxes a good deal?

Hmmm. This is really an after-tax cost of money exercise vs. other possibilities. If my after tax cost of mortgage is 2.5% or less and my portfolio generates high single digit (or better) returns, you would be walking away from a lot of money over several years to prepay.

Counter party risk in paying off debt: zero, as in you are guaranteed to always be out of debt and have zero interest expense if you pay off your debt. You are guaranteed to always have this improvement to your net worth statement, forever, by paying off debt.

Counter party risk in not paying off debt, investing debt repayment money for income that might exceed interest on the debt: Far, far, FAR higher. A company you invest in pulls an Enron (or Washington Mutual, or you were a GM bond holder, or AIG stock holder, or….fill in the blank, and don’t have the arrogance to assume you’ll be smart enough to avoid these), you’re hosed. The Bernanke screws with the currency – you’re hosed. One time asset tax to pay part of the national debt, you’re hosed. You still have the debt and now your income stream is cut down and a significant fraction of your capital is wiped out while you still owe the debt. This is not a resilient situation, it’s a vulnerable one.

There are 2 sides to the ledger: Income and expenses. There are 2 sides to the net worth statement, assets and debts. The individual can control the latter of these two FAR better than the former. Avoid expenses by adopting a frugal life style. Avoid debt (or pay it off as quickly as practical) to increase the net worth. Both of these cases result in very resilient lives – I owe NOTHING to no one so therefore I don’t NEED a big base of assets to cover it. I have very low expenses, hence I need only a minimal income to live well.

Leaving this for anyone else in this situation working through the old posts like me – one other consideration not mentioned in the calculations is the expected rate of inflation. If you have a 30-year fixed rate mortgage and expect inflation to go up in the future, that is another argument for not paying it off earlier. Of course, that would not apply to someone who is living off retired and living off a fixed annuity or some other non-inflation following source of income, but for those still working (and in a job that gives reasonable raises to keep up with cost of living increases) or invested in stocks or rental homes (prices/rents tend to rise with inflation) then keeping the mortgage would result in a better real rate of return as inflation increases.

This is an interesting discussion, for most paying off that mortgage is probably the best thing they can do. ONLY because, for most they’d spend a portion of it on frivolous bullshit. If you’re like MMM it seems reasonable to suggest you wouldn’t.

The only other reason you’d pay it off is if you’re earning less than 3% on your investments. And If you’re earning less than 3% its probably time to re-think your portfolio.

Thanks MMM!!! I needed a kick in my pants! I have 21000 on my credit card at 0% interest until October. I have been paying it down 3000/month so I will be at 0 by then…but I have also been spending money on eating out, going to the movies and other stuff that I don’t need. I am going to bump up my payoff!

You are a total Money Badger! This is a fantastic post. http://www.youtube.com/watch?v=4r7wHMg5Yjg The whole point of the money you are losing in interest being money you could spend on fun stuff like at perpetualkid.com is what caught my attention to pay off my debt in the first place. I was spending 100 bucks a month just to own a piece of plastic when I could have had my very own mustache!

Speaking to the ‘genetic versus cultural’ idea of financial responsibility, I came from a home with no sense of money. Parents always, always overspent and never had a plan of any kind. I bought the house from under them 10 years ago in order to rescue them from bankruptcy. (Awful investment for me as they pay me no rent, just insurance and taxes). They are again now way under due to credit cards and government loans. All three siblings are equally terrible with money. Profoundly bad.

Fortunately their ways never rubbed off on me. I am financially independent in spite of my upbringing. I have flirted with far too much consumer spending in hindsight over the years, but I never seemed to rack up the debt all that much.

So as for me, no frugal/FI gene in my blood. Had to be cultural/learned somehow.

I love your blog. This post is so timely for our family. Sadly, we didn’t punch debt in the face. For a few years, we gently nudged it. Even with a more delicate approach, we have been able to pay off hundreds of thousands of dollars of debt and build up quite an investment portfolio.

Last weekend, one of our oldest friends had an EMERGENCY with a capital E and needed to borrow some cash. He has a good job, nice house, and decent education. He went over his balance sheet with us and we were floored. It has been so long since we left the American consumer lifestyle behind, it seemed really bizarre someone would have so much useless crap and no real investments. When his emergency passes, I will be directing him to your site where, hopefully, he can learn a little…

@MMM you write, “You don’t start a family … There will be plenty of time for these things later, …” I believed that, but it wasn’t true in my case; were there one thing in my life to date I’d have done differently in retrospect, it’s take on debt to be able to pursue infertility treatment or adoption sooner than I did.

How you know which choice is right for you I cannot say, but I for one don’t believe that delaying having children if you are otherwise ready in order to pay down (or avoid taking on) debt is always the right choice (this is particularly true in the context already referenced in others’ comments, where debt is cheap).

I’m on board with you bogart. MMM has his financial situation under control, but his circumstances are probably vastly different then a number of the readers. Certain things aren’t worth waiting for.

I read another post above highlighting a gentleman turning down a golf trip with friends. I take a yearly golf trip with old friends and I would NEVER give that up – it far out weighs its cost as it allows me to reconnect with friends I don’t get to see frequently. I’m debt free and live a relatively frugal lifestyle, but I have a number of friends who have student loans, and perhaps they should cut other costs but the golf trip – never.

True Bogart – you can always find exceptions and holes in these rules that Mr. Money Mustache is laying out. The goal is just to write something that applies to most people, most of the time – with the examples given in the article being typical ones.

Student loans – especially those at low interest rates – are one exception. It’s much less of an emergency to pay off a loan like that (while you might not delay child-raising, you’d still be wise to live a very frugal lifestyle until you get back out of the red).

Mortgages are not an emergency at interest rates like we have today. It is reasonable to expect that stock or real estate investments will pay greater returns than paying off your mortgage. But again, buying $300 shoes while you still have a mortgage and are not financially independent? Dumb.

The only super-duper emergency is high-interest debt, like the credit card crap described above. That is so expensive, that its worth delaying almost anything to get out of it. And this article is simply to point out that most people don’t make ANY sacrifices to get out of credit card debt. In fact, they do exactly the opposite – buying even more frivolous stuff, because they think the debt is a normal part of life.

So that’s my real point: consumer debt is NOT a normal part of life. It’s an accident that needs to be fixed or avoided.

I do think much of the debt that is available to those with good credit and decent incomes at the moment is so cheap that honestly, it’s hard to justify paying it off ahead of schedule unless there’s some other rationale for doing so, but I do live in something of a “bubble” in terms of stuff like being aware of what others are paying for credit card debt because … yeah, yikes.

Can someone who is a hardcore mustachian tell me whether it is a good idea to consolidate student loans aka refinance or is it better to pay the loans through the snowball effect (starting with the highest interest bearing one first)???

High interest debt is tackled first. lower interest debt second and
preferred debt (debt you can deduct like mortgage interest) if the rate is low enough, can be tackled last or not at all. I am actually not a fan of paying off homes early. It’s a long discussion but in short I think the money could work harder leveraged than it could paying down the interest. At least at the current rates. Also, paying extra principal doesn’t protect you from foreclosure should you find yourself unable to make the mortgage, the “Extra payments” would be better off in a cash flow investment or savings side pot IMHO.

Being a real estate investor I am actually getting mortgages back on paid off properties at historically low interest rates to invest in other real estate properties at historically low interest rates and prices. I imagine most people will stick with dividend earning stock (I do that a bit too) but the point hods.

I thought the “snowball effect” was one of the psychological tricks used by Frugality 101 writers (e.g. Dave Ramsey) to pay off the smallest *balance* first, so you feel accomplished about yourself, and then continue in order of size of balance.

It’s not the mathematically ideal plan, but if you are still in the Frugality 101 class and you need those baby steps, it is *way* better than staying in debt forever!

MMM love your blog. What’s your opinion on student loan debt whose interest rate is less than inflation (1.87%)? From a pure math perspective it seems like my money would work harder in a retirement account rather than paying the loan down.

I’m in the same boat, I’ve got a student loan below 1% interest and while on one hand I would love to get rid of it – I know that from a math perspective I should keep that loan stretched out as long as I can while paying down my mortgage (my only other debt) and building my stash. . . my online savings account gets slightly higher interest than the student loan.

I’m in a funk. I have $125,000 in student loan debt, much like NMHD. However, I already live a frugal life and my only assets are my non-extravegent car I need to get to and from work and my small emergency fund. Almost half my paycheck goes to debt and it will still take me 7 years to pay it off. I would like to get a second job, but I travel so much for my day job that a.) I’m not sure too many places would want to hire me if I’m gone every other week and b.) do I really want to spend all that time away from home and my family for minimum wage? I either need to suck it up and start looking forward to 7 years from now, or I need to get creative.

I think you know the answer to that, go ahead and get creative. It’s possible you will strike out with some ideas or make mistakes, but that’s ok. As long as you are not adding to the debt, you have little to loose by trying.

Even if it’s a very small thing, start there. Every little bit you take off that loan at this point removes not just the principle you pay off, but also the interest on that principle you would be paying for the next 7 years. If you pay off $100 of the principle next month, and your interest rate is 5%, you are actually decreasing what you will need to pay by $135. As you pay down the principle more and more of your normal loan payment goes toward principle.

The emergency fund is $3,000. My husband is a full-time student. With only one income coming in, we need the emergency fund. When he gets a job (hopefully in the next couple of months) we’ll have a lot more flexibility with that $.

” I either need to suck it up and start looking forward to 7 years from now, or I need to get creative.”

I would do both. After 7 years, you will be an expert at living on half your salary or less. You can carry this invaluable skill forward and start saving LOTS of money.

I would get creative by trying to look it as a game of “How Fast Can I Destroy My Debt”. I would put a Big Ass Chart on your wall that up update monthly so you can see the debt destruction.

You might be able to find a side business you can start (blogging, sales, etc.). Can you get a higher paying job in the next year or two. Are there more ways to be frugal and still be happy? Every little bit helps.

This article is fantastic!! So many people don’t feel a sense of urgency to pay off their 100,000 dollars worth of debt, because they are too preoccupied planning their next luxury vacation. I definitely feel a sense of urgency when it comes to debt, which is the reason why my husband and I are planning to pay off our house next year. What’s the point in keeping the debt around when we can be pocketing all that extra mortgage payment? I have found it incredibly life-changing to buckle down and figure out a means to pay off this debt, no longer do I spend extra money on shopping or extravagant stuff that I will never use! When you have a goal, there is no waivering, because it will SLOW YOU DOWN!!! If I got a dollar for every time people said “but you need a house payment, what are you going to write off?” Whoever told them you need a house payment to avoid giving the government 2,000 to instead give the bank 10,000 dollars of interest a year should be SHOT! Ridiculous, doesn’t make sense!

Some people believe that it makes more sense to take those extra payments toward the house and use the money instead to purchase assets that out perform the savings gained by eliminating mortgage debt. Since the mortgage debt has the advantage of being tax deductible it is one of the cheapest forms of cash available to people looking to leverage money into other investments. If you just want to get out of debt and build up your assets column later, that is fine too but it may build wealth slower than leveraging.

I think a lot of people who are in debt simply can’t see the emergency of it, because they, and everyone else they know have lived with mountains of debt for years. It’s simply how you have to live these days if you want a nice life, right? I mean, if it was such an emergency wouldn’t everyone be frantic to get out? Nobody is, so what’s the big deal?

I think, intellectually, they know the debt is a problem and they live in denial of the trouble they’d be in with a job loss or other catastrophic event. But huge car payments, an underwater mortgage, thousands in credit card bills – all of it is normal. Hard, anxiety-ridden, sure. But it’s normal.

Something else has to trigger the desire to get out of debt. It’s probably different things for different people but only after they see how free and easy life is without debt can they begin to appreciate the emergency of it. It’s like surviving any emergency; only after the fact do people break out in a cold sweat when it dawns on them how close to the edge they were.

As for the time involved, well…around 10 years ago, I was in the hole around $40,000 – $50,000: credit card balances, the remains of a 7 year car loan, and my mortgage on a small 750 sq. ft. house. I had a little money in savings, and a 403(b) at work which was doing okay, but the savings was for emergencies. If I used the savings to pay down debt, it would barely make a dent and what would happen if I had an emergency? (Even writing this makes me cringe now, but at the time all this seemed perfectly logical.)

Anyway, it became obvious that all this debt (interest) was really preventing me from doing things I wanted. It was clear that I could be doing many other cool things with my money if I didn’t have to pay all this interest. That’s what got me slowly, tentatively started on digging my way out.

Why not jump in whole hog? Because I didn’t know how to live without debt. (Remember, debt is normal for the vast majority of people, they’re comfortable with it and as far as they can see, it’s the only way.) Living without debt is a learned skill, and like anything new, you have to get your feet wet, make mistakes, and see what works. I am sure this sounds completely bizarro to you congenital mustachians but I’m sure I’m speaking for a lot of the rest of us.

So, long story short, when I finished paying off the car, I immediately began putting the car payment – around $350/month if memory serves – on the credit card debt. As I gained confidence in my ability to live without using the card, a funny thing happened…I got good at this. I began to look for other ways to cut expenses to make this go faster. And it almost seemed that as I became more responsible with my money, money kinda began to show up unexpectedly. (I hate how woo-woo that sounds, but it really seems like that’s what was happening.)

Anyway, I think it took another two years or so but in October of 2007 I paid off the last of the CC debt. All that money (debt snowball style, though I hadn’t heard the term at the time) that I’d been putting toward debt was now used to build more savings and pay down the mortgage. In October of 2009, the house was paid off – almost 5 years early.

Then I set my sights on early retirement. I’d been putting in a putzy 3% in my 403(b) for years and there was an employer contribution as well. But I turned 50 in 2007 and suddenly retirement seemed real, not some fuzzy, far off pipe dream. How to get there sooner than later? Turns out I could retire at 55 w/ no IRS penalty as long as I “separate from service”. That became the goal.

Well, as a result of the forced frugality from living with CC debt, followed by voluntary frugality while paying down debt I found I was now a bona-fide debt-averse frugalista. So I met with the TIAA-CREF advisor and doubled my contribution, even before I’d finished paying off the mortgage. When I told the guy I was debt-free except for the house, his eyebrows shot up. I could tell almost nobody tells him this.

Then the crash of 2008 happened and my account lost something like 25% which he said wasn’t as bad as for a lot of people. Ugh. But he said I probably would have to work another two or three years longer than I wanted. Uh, no. I jumped my contribution to $18K annually, made a few adjustments and never missed the money. And a year or so later, I maxed it to the $22K allowed under the IRS “catch-up” provision. Originally, I did this as I thought I was looking at a 4% pay hike, but that didn’t materialize due to county budget issues, but again, I never missed the “lost” money. I now gross around $65K a year and I’m currently saving 41% of that. Last year I lived on about $27,000 and I expect that to drop to around $24,000 this year.

Happy ending…I turn 55 next month and I will indeed be retiring as of 5/31. Depends on how bad you want the freedom and really – it’s never too late. I love how all you guys on here are 30 or 40 somethings, but for those of us that are a little older, it’s still doable. I made many mistakes, and I don’t have a huge nest egg, but it’s enough and I can bring in casual income from my art if I want. And my expenses keep dropping. It’s now a game to me, how low can I go – what new frugal skills can I learn – and still live well. Time and creativity are my friends.

So, in hindsight, yes, I understand why MMM says debt is an emergency. But my point to this looooong post (sorry!) is to encourage anyone who is where I was ten years ago to just start. Start slow and learn. Start big and learn. Just start. Then keep going. When you have success, it will build confidence and you’ll suddenly find that getting out of debt is waaaay more fun than buying crap.

I’m not sure if I understood this paragraph correctly, so let me know if I’m off base, but —

…I had a little money in savings, and a 403(b) at work which was doing okay, but the savings was for emergencies. If I used the savings to pay down debt, it would barely make a dent and what would happen if I had an emergency? (Even writing this makes me cringe now, but at the time all this seemed perfectly logical.)…

My general opinion of emergency savings is that they are *very* important if your only other alternative for handling emergencies is going into *more* debt. Especially high-interest credit card debt. Now, if you’re a Mustachian and you have a 2% HELOC that you can draw from if something dire happens, great! But if you’re already in a ton of credit card debt, having $3000 as a cushion against the water heater dying (or whatever) will save you from just putting that water heater repair on your credit card.

(Bias note: I’m a big one for emergency savings myself, because of my somewhat irrational aversion to debt itself. Even though it’s not *always* the mathematically correct answer.)

Although I had savings, it wasn’t much, because of what the debt was costing me. So when I had an “emergency” (I have since figured out that there are no real emergencies), I’d put it on the credit card anyway because I didn’t want to touch my meager savings. So the savings just sat there. Slowly, though, as my income improved I was able to at least meet these situations with a hybrid plan. This will probably sound terrible but when I needed a new furnace, I “financed” it by first putting it on the company’s “one year, no interest” account. Then when the year was almost up, I went to my credit union and got a loan for around half the amount. I paid off the one year, no interest debt with half from savings plus the CU loan which was at a much lower interest rate than the one that would have kicked in had I kept the original financing through the furnace company.

It can take some time to turn things around if you’ve made a lot of mistakes. Depending on their resources sometimes the most Mustachian approach will be to be as smart as possible given current constraints.

I realize now, however, that there are no emergencies. There are only expenses with an unknown date. If you have a pet, at some point there will be vet bills. Guaranteed, it will happen. If you have a car, there will be repairs. If you have a water heater, it will have to be replaced. I now just keep a pile of cash in savings – I know what it will be used for, I just don’t know when. But I no longer think of it as an emergency fund. I think it’s a matter of mindset – the word “emergency” implies surprise, as if we had no idea that water heaters don’t last forever and just when we least expect it, they decide to give up the ghost. Emergency thinking is a sort of victim thinking which reinforces a broke self image (at least for me, anyway).

Oh, I see your point about calling things “emergencies” vs. not — you’re absolutely right to not view things like “the water heater breaks” as *surprises.*

And things that are true “surprises” (sudden severe illness, e.g.) aren’t really things that you can save up enough money for, so it’s not really worth worrying about them. Just focus on the things you *can* predict and take care of yourself overall.

Kathy P. This is a great comment. I think you illustrated how many of us struggle with the way we think about money. We are never done and there is always room for constant improvement. I am looking forward to curling up and reading your blog on my not so frugal ipad (but very well loved that we bought by selling old stuff btw).

Thanks to MMM too. Got me thinking I need to kick the student loan out to the curb. It has been hanging around too long. Just lining up another job right now to use the extra money to pay it off.

As someone who is looking at many more years of paying off student loans, I can’t imagine credit card debt too. I had a GAP visa in college which I was using the card for its GAP discount on clearance items once every few months. I missed a payment on a $4 item and got an interest charge. I found the whole thing ridiculous and haven’t used another credit card since.

While I will never reach a full MMM (children are my vice), I use personal finance blogs to keep me motivated. (has anyone noticed that thesimpledollar.com is going off the rails?) I even write my own hybrid, but I’m all about measured purchases. For example, we have only one TV and no cable. The TV picture is starting to go, even though we watch it on Saturday nights for an hour. I’m saving the money from craigslisting various unused household items to get to my $250 flat screen TV fund.

Bought my car new,paid cash and still driving it 23 years later. Only debt I ever had in my life was buying my house and paid off the loan in 5 years. Been earning an average salary all my life and currently investing over 70% of my gross earnings every month. Doing it effortlessly and not feeling it’s a sacrifice at all. Paying interest on borrowed money is simply stupid:You throw away money that took time and effort to earn.
Wealth is not money, it’s a state of mind.

I too like the idea 0% debt that some of the cards now offer for 15-18 months. But the gotchas and the short time horizon makes it less useful for investors than the 30-year debt you can get at around 3% just by using a home mortgage. However, as long as you find the pastime enjoyable and are good at making the deadlines without slipping up, it’s pretty good.

I’m finding that the big sign-up rewards are more useful than the debt. I’m up $1000 this year by signing up for three cards – two of which I actually needed for business. That’s a reasonable chunk of my $24k annual living expenses, and I’m a pretty low-key participant. Some people go crazy and collect $5k/year.

But while it’s real money, it’s not as fun as building things out of wood and metal, or writing articles for this blog.. so I don’t think I’m going to be making a long-term habit out of cycling through $400 rewards cards every month. I’d expect the card companies to catch on and close the loophole from people like us, but so far it just keeps getting bigger.

As a mid term reader and a first time commenter (on any finance blog!) – I feel really quite chuffed that the big man replied :). I now feel a personal connection with your blog… I digress.

You say:

“But while it’s real money, it’s not as fun as building things out of wood and metal, or writing articles for this blog.. so I don’t think I’m going to be making a long-term habit out of cycling through $400 rewards cards every month.”

For someone that once ironed and filed their $5 bills I’m surprised that this “less than fun” way of making money has passed you by – exploiting the 0% credit card game.

The difference in approach may be explained by the fact I am in the UK (I use a $’rate for comparison purposes). The reality is that in the UK there are no big sign-up bonuses, but quite a few 0% options.

I have to say I would be all over a sign-up bonus like a [shaving] rash. In fact a rash x2 as I’d suggest to my wife she also sign-up…

However although it is not fun – it really is quite simple: All I do is put my monthly spendz on CC (which has other consumer rights benefits above checking accounts) and lump what I would have spent into a ‘high’ interest account.

A quick calculation tells me that if I: take out an 18 months 0% card with a $10,000 limit (1% min repayment). Spend $600 a month on the cc and invest that $600 in a 4.5% account. When I come to repay that card in 18months time I would have earned a net $320… just for doing my normal spendz. Compound that $320 a year… you know the rest… Thats a lot of $5 bill ironing MMM!

Anyway my point is.. Be the bank! Banks make money. In simple terms banks borrow cash at a low rate then lend to others at a higher rate. If you have no debt, and have any necessity to spend money this really is a no brainer.

You’re right – but it still takes work to do that credit-card-signing-up and management.

When you’re still working and saving for retirement, your strategy makes perfect sense – you are willing to do even boring work, if that’s what pays you the highest return on your time. In the US, these big-bonus credit cards would definitely qualify, since you earn hundreds of dollars per hour of “work”. That’s why I even have that credit cards page on this blog – because I think it can actually be useful to the right people. (After reading the other comments on this article, I’m even more confident MMM readers are not the type to use credit cards to shoot themselves in the foot)

However, once you reach financial independence and have plenty of money for your needs, you may try not to get sucked into work or other activities just for the money. I recently turned down a huge and high-paying renovation project for a wealthy customer because she was just extremely annoying. That felt better than any paycheck!

Hi MMM,
Great article. Loved it!! It spoke right to me. I have a question though. I don’t know what to do about this 13K we lent a friend who said he would pay us back and can’t right now. Yes, I have beat myself up enough over this huge mistake but now I have been putting $250 per month on the debt which is on the Secured Line of Credit @ 4%. I am continuing to grow my stash while making this payment each month. Do you think or anyone else out there think I should just pay this off asap or should I just keep making the monthly payments. I track it as part of our expenses as a) a reminder to me not to make this mistake EVER again and b) he will likely not pay us back for a very long time or never-needless to say the friendship has gone quite cold between him and my husband and I.
Any thoughts?

Lending money to friends and family is sure way to change the relationship. If you must lend money, do it, but in your mind, write off the money as a gift. If they come back with the excuses, you can say – no problem, pay when you can. If they repay, bonus.

Yes but how would you manage the payback – put $250 down on the Secured Line of Credit @ 4% or pay it all back and not use that 13k of the loan as part of your stash until my dh and I can pay it all off?
I am not sure I am explaining this right but I hope you can respond to me. Anyone really!

No one my age (26) seems to understand the real problem I have with my debts (personal and student loans). They aren’t much ($45K total) but I did the math, and it equals at least $400-600 I will save a month. I have been following you for a while (and NHMD) and I am glad that people out there in America realize the game being played around us.Soon as I get a job, i vowed to eliminate $10k of that debt this year (CC, perkins loan and Car loan) leaving only a student loan.

Also I like the part in the article where the wife asks you to let up cuz her husband likes sports tv. I imagine you standing over her with your glorious mustache repeatedly pounding in her face with money covered hands. Not in a violent way of course, but more like a silly Looney Tunes way. And every one of your windups were emphasized by a financial lesson: “YOU will not BUY!” Wham! “Drop those shoes!” WHAM!.

It always amazes me as well how indiviuals claiming to be living frugally or “trying” to get out of debt find a small amount of debt acceptable. It’s like saying a small amount of a disease is acceptable! What?

Awesome post; I’ve read it 3 times already. After the second time, I immediately logged on to my credit card sites and paid off some debt. Then I went on Mint and adjusted my budget for the month to allow for more debt destruction.

No smartphone for me, until this debt is gone! (actually now that I’ve spent more time on this site, I am thinking of changing that to “No smartphone for me.”)

I found this article through GRS comments – I know it’s old, but I do have to say I’m glad to have read it!

We are just about to pay off my student loan, even though the rate is low, since it’s debt and I’m sick of it. That’ll just leave us with a mortgage (under $100k) and we are STILL IN GRAD SCHOOL! Of course we’ll be going down to bare bones budget for the last few years, but it’s motivation to get through the program!

I almost had a panic attack once because I thought my credit card payment was late by one day (yeah, it wasn’t) and I had a whole $25 on it! I don’t understand how people can sleep, eat, or function with $5k+ balances that they carry on them!

But we’ve also been lucky in that we’ve never been “really poor” so perhaps I’m a bit of an elitist, although it sounds like a lot of other people here are too so I guess I’m not alone. (“Really poor” is hard for me – I made less than $15k while doing my MS and I still lived in an apartment, had a cat, drove my car, and ate lamb when I wanted – plus I saved up over $5k within two years and flew to see BF, now DH, every 2-3 months so I don’t know exactly what people mean when they say that, but I’m sure it comes about when you add in a lot of “required” payments, like debt, mortgage, car loans, etc!)

Amen!! What a fabulous post! We’ve paid down about $20K in debt in 3 months from selling things, picking up extra work, etc. Every time I see the interest I’m paying on our debt it makes my stomach physically sick.

We used to live like everyone else and do stupid with zeros behind it. Now we are radical..absolutely no extra spending..no restaurants, no mindless grocery shopping (saving $500/mo and losing 23 pounds, hubby 40 pounds), cooking everything from scratch, no buying clothes (used if absolutely necessary), no phone lines, no cable..nothing.

I’m sick and tired of being in debt and look forward to making myself rich instead of the banks and credit card companies.

Hi guys, I’m new to MMM, just found it today! Gradually working through the articles, but would love a bit of guidance.

I’m 24, just paid off my student loans and have a decent little emergency fund saved in the bank. I have just started a shares portfolio (it’s tiny but it’s a start), started investing in bonds, and have two superannuation schemes. One I pay the absolute minimum into basically in order to get tax benefits, the other I’m putting in 14% of my income but am able to withdraw in 5 years.

I have life insurance with income protection and a permanent disability benefit.

I plan on saving 40% of my net income to a savings account with 4% interest. I don’t currently have any debts. When I have a big enough deposit I thought I could invest in property.

What could I do next to maximise my growth potential? Please bear in mind I’m in New Zealand, so I don’t have access to a ROTH or 401k. Am I on the right track? Thanks!!

Moustachian noob here. I just wanted to say that this article inspired me to pay off my student loan debt over the next few months. I just made an $8000 payment, and it feels good. I’m lovin’ this blog, and hope to be able to practice many more elements of it.

I agree, except… (I mean, come on, you knew it was coming, so why delay it) If I do things correctly (i.e. follow the rules and make the required payments) i won’t have to pay off some of my student loan debt. I am totally avoiding consumer debt like the plague, and living extremely frugally. I’m watching interest rates and avoiding interest on everything I can, BUT if I can pay only half of my student loan debt because the federal government likes the kind of work I do, I’d kinda rather do that.

I did the calculation you mentioned, and it’ll take me a decade to get enough to retire. If I do this loan forgiveness program, I have to work for 10 years. I think it’s a win-win, or well, I win, and nobody loses, exactly.

I thought I was debt free until I had to buy out a business partner at the end of last year. That saddled me with a high interest business loan and a loss of the money earmarked for investment outside of my business. My remaining business partner and I have stabilized the business, but we still cringe at the amount of debt we took on. There is basically no investment that will pay 10%, so paying down the debt supersedes all other priorities. I should have it finished off in the next 10 months by allocating about 50% of my income. The positive is that my fiancé sees how stressful this is for me and is taking baby steps to improve his own (positive net worth, but not by a lot) finances.

Hey MMM,
This is a fantastic article. Definitely in my re-read and remember section! I understand the benefits (monetary wise and psychological) of paying off debt first but what if paying off debt first isn’t the best mathematical option?

In my situation I am “consumer” debt free, but I have a mortgage ($46K) on my condo and an investment loan ($24K), both considered “good” debt (really all debt is bad but bare with me). Do I (1) pay down the mortgage @ 2.85% interest, (2) pay down the loan @ 3.5%, or (3) invest for the long-term @ 5% (being more conservative than the 7% return you mention). I generally don’t opt for an all or nothing approach and instead I’m focusing on savings and my mortgage. The reason I’m not paying down the loan is because I can write off the interest on the loan and not on my mortgage.

Moving forward I plan to buy a house and rent out my condo. Until then, I’m planning to switch to saving as much as I can in my TFSA so I have enough money for my Phase 1 retirement (age 45-60, Phase 2: 60-100 will be handled by my RRSP). Once I’m in the house someone else will be paying the mortgage payments on the condo and I’ll have more saved up. Does it make much sense for me to pay down the condo now when I can put more into my TFSA instead?

I’m really curious what your, or the Mustachian community, thinks about this.

When the condo becomes a rental property is that a write off? I know we can’t write off mortgage interest here in Canada on our primary residence but I think investment properties are different. If that’s the case it would come down to the math. What will you spend on interest and does it make sense to have it as an expense as a rental? When is it due for renewal and based on your crystal ball what rate will you get at that point? Does the math still work? Knowing you own the roof over your head would give me huge peace of mind. For a rental property it would come down to the math.
In terms of the loan debt, can you still sleep well if your market returns are suddenly 3% rather than 5 or 7%? Sometimes the “right” answer is more about knowing your personality and than straight math. Your first sentence sums it up exactly – from someone who lives and breathes spreadsheets this is not an easy thing to say.
Personally I know mathematically our investments are waaaaay out performing the 3.3% rate on our mortgage. We maximize our RRSP contributions each year but that doesn’t stop me from paying our mortgage every two weeks, rounding up the regular payments by nearly $300 each and making an additional $12k/yr in extra lump sum payments. Mathematically it may not be the best choice but knowing we will have it paid off in under 3yrs makes me happiest. If we weren’t trying so aggressively to kill the mortgage we’d be putting more in our TFSAs after we max out the RRSPs. Once the mortgage is done we’ll redirect the entire amount going to the mortgage catching up our TFSAs, building our retirement travel fund, and completing one last round of house repairs/replacements before we pull the plug on our salaries. We don’t do an all or nothing either. Every week we skim off the excess and depending if the markets are having a sale or not we either contribute to our RRSPs or make an extra mortgage payment. As long as we contribute our full target amounts for both by year end we try to time the RRSP contributions to the markets that day and don’t worry beyond that.
One question, why do you plan to use your TFSA first and RRSP from 60+? We’re thinking we’ll do the reverse and pull from the RRSP when we are early retirees (45-60) and have no other pension or government benefits, and then once that’s gone dig into the TFSAs since they won’t be taxed and won’t impact our tax paid on pensions/gov benefits income. Maybe we’re missing something, I’d love to hear your logic.

My comment may be too late, but be careful with the tax implications of your plan. Like, talk to an accountant or tax lawyer ASAP. Often in Canada if you move out of home A and rent it out, and buy home B, you don’t get the tax deductions on mortgage interest that you’d hoped for.

Reread this one. Way out of debt now myself but I started wondering, shouldn’t we (and I’m not being my usual sarcastic self) treat not having reached FI the same way? As in, we could all be free and not slaves very quickly but instead we rent DVDs and drink expensive bottles of wine. How quickly do you want to get out of slavery?

That’s a good question and probably depends on how much you like your current working setup. This is why I advocate a middle road – the 50-75% savings rage, which allows you to sample from most of the luxuries of modern society – instead of the hardcore route of living in a tent on $3k/year.

I figure get expenses down to the minimum that you would be happy to spend for the rest of you life, then wait until investments can cover it. No sense living on much less and getting to the target and realizing that you don’t actually want to keep living in a tent for the rest of your life. Just make sure to reexamine periodically once you hit that comfortable bottom.

I know many people have student loans with higher interest rates, and of course those should be paid off before investments, but I have to say I (respectfully) think in the long run this HBS gentleman could have done better than paying off at least some of the student loans to invest in equities, because he has shown himself through this process to be a disciplined person and therefore might have done even better to adopt the same frugal ways but max out that 401k and buy additional investments instead of repaying the loans. My student loans range from 0.4% to 6.6%. For the 0.4%, I could buy a us treasury bond and pocket the difference instead of repaying. Instead of repaying, I’ve bought equities through index funds since graduation. As you might expect, I’m averaging about 10% per year IRR on equities purchased throughout the time span since graduation (a bit more now, actually as the market up, but you would expect about 10%). Had I paid off my student loans instead of buying stocks, I would have forfeited that 9.6 to 3.4 percent spread and be down many tens of thousands of dollars by now. Putting off repayment of the federal loans also functions as a sort of life insurance, since they go away if you die, while if you pay them off you have given up this benefit. For really disciplined savers who would not change asset allocation and have a 30 year investment outlook, which does apply to many college or business school grads, historically this has been the correct answer. No guarantees about the future, but if you have to gamble (and you do in fact have to pick one side of this bet if you go to school, since you either borrow or don’t and/or either invest or repay), you might as well pick the side that has been right throughout known history.
For the HBS guy, kudos to your new discipline, consider whether you might also be a disciplined equity investor!

For me, owing someone money feels like leaving a 100W bulb on in a closet. I don’t know if this makes sense to anyone, but we used to have a small closet with a 100W bulb with the little hanging chain. This was the 70s! And it was all too easy to leave that light on and close the door and it would sit there burning away for nothing. As a kid, this drove me nuts. The very idea! So this is what it is like when I owe people money. Like I know the light is on the the closet!

I feel the same way: Debt is just a light word tossed around. And just because we all have some of it somehow makes it ok. I think part of the root problem is that many people fundamentally may not know the difference between GOOD and BAD debt.

I accidentally discoverd this website by miss clicking from a video game subreddit (Marvel Heroes) to the main reddit front page (first time there). I curiously clicked a few threads in various subreddits I came to a thread titled “$105,000 paid in full”. After reading the main OP and reading some of the comments I started skimming and found a link to this page.

I am currently in a financial emergency (for me) owing about $10,000 (credit card) and about 4-5 years behind filing my taxes. I have started a young family recently and am facing the fact that I can’t find a rental property for my family (due to credit checks and income history requests) and we may very well be homeless in the next few months.

This site is what I needed but as a life long worrier, procrastinator and someone who has difficulty making decisions I feel it may be too little to late for me. I don’t know if my girlfriend and children are ready for such a drastic change but it is what we need in my opinion. If you are replying to this blog post still I would greatly appreciate any thoughts on “what to do next” in my situation. I am working some what steady with decent pay for how long I do not know. What your site offers is similar to what I have always wanted but I just never knew how to get there.

Thank you for making this site I will be scouring its pages in the days and weeks ahead. I have always hated the feel of a mustache on my face but this mustache just might be the perfect fit.

I don’t know about where you live, but here our local councils have free financial advisors to help you get on track with debts and finances, they can call companies and get lower repayments and consolidation etc. Good luck!

It sounds like you guys are headed down the road of frugality whether you like it or not. You can either dodge taxes, avoid bill collectors, live only in areas where they’ll take you with no credit check, and generally feel stressed out all the time as you are dragged into forced frugality…

…or, you can look at this as a chance to get your life back and to discover a different way to be happy. I, too, was in a debt emergency with a young child and wife at home when I discovered MMM. My biggest mistake was to try to convince her that we had been wasteful and now had to pay the price for it. DON’T DO THIS! My wife didn’t want to hear that we ate out too much, but she was elated when she realized I was serious about making and eating meals together as a family with no electronic distractions (aside from the occasional dinner/movie at-home treat — $1.29 from Redbox). She didn’t want to hear that we were spending too much at Starbucks, but she was very happy once – after some experimenting – we finally figured out how to make coffee at home that she absolutely loves (she is making a second batch for the day as I type this!). She didn’t want to hear that we weren’t going to visit the bookstore and drop $30 every other week, either, but she is loving all of the extra trips to the library with our son.

We are happier now than we have ever been in our lives. We are still shaking off some lingering debts, but we are on the right path. Just knowing that I can retire before I’m decrepit is a huge weight off my shoulders. I used to sit and worry that I wasn’t “making it big” yet and felt that, unless I did, I was going to work until I was in my sixties. I felt that I was guaranteed to leave no impact on society, because I was just going to pour all of my energy into working until I was useless. Holy shit, things are different now…

I don’t know what you bought with the debt you now hold, but I’m guessing it didn’t make you happy. Time to try something else. Congratulations…mis-clicking a link on Reddit might have been the luckiest event of your adult life outside of putting together that wonderful family. Best of luck…and keep us updated. Even if you haven’t thought one more second about MMM since you posted this…it is never too late. Search ‘stoicism’ and ‘hedonic adaptation’ and realize that you aren’t giving anything up except your misery.

Your bottom line message is no doubt not only great it is pretty much essential and would help the majority of the people out there. Never the less, we should keep in mind that Debt is also an essential element of economic growth and makes life much easier and “profitable” if applied correctly.
95% of major companies and 99.9% of all nations hold debt. The reason for this, is that there is a significant economic advantage of building wealth or a prospering nation (or household) with debt. However of course, there is an optimal debt level (amount you borrow) and an maximum interest rate ceiling where borrowing is not advisable anymore.

How is this relevant in respect to your article?

I believe it should also be noted that Debt can be viewed more like a weapon. A weapon can be used for good things such as protection or for the hunting of food (survival) or it can be used in horrifiyng way such as war or threating somebody.

Most Consumer debt seems indeed econimically very hard to justify (there is a few exceptions depending on the interest rate environment). However, many other variations of debt, especially the one on your house (mortgage), is for many people the only chance to achieve a certain quality of life in a reasonable time span. Working all your life long just to pay down your mortgage can not be the goal. Instead from an ecnomic perspective, leverage should be managed in order to expand your wealth. There is nothing wrong with also letting your “good debt” grow over time as long as it is in an appropriate proportion to your assets (just like all goverments).

I am very well aware of the fact that this is not for everyone and debt is a tool that has to be handled responsibly. While Consuemr debt is a no go, from an economic perspective paying down your mortgage (especially in full) is not advisable in all scenarios for optimisation of your economic well being.

I am an Investment banker from Switzerland and while some of our big banks have not applied Debt very wisely (UBS, Credit Suisse) the nation has applied its debt management and a very fortunate pace which has lead to properous wealthy nation even during troubled times.

So maybe an article that also emphasizes on the potential good sides that debt does for a household or individal would be interesting to see on this site as well.

I agree with this comment very much. I also enjoyed and agree with the blog post. But as a practical matter, while it’s always good to avoid paying interest if possible, some debt can be useful like student loans and mortgages. Can be useful. Unfortunately, we’ll have scam artists similar to Countrywide and University of Phoenix for the foreseeable future…

What I wanted to add is that, not only is some debt very useful (and, sadly, as with medical debt, necessary or involuntary), but there are some debts that you really shouldn’t pay back at all. I’m new to this blog so I would be surprised if you didn’t discuss some of these things elsewhere, but it’s relevant here. I’m no mustachioed wizard of finance (hope you know the tune), but here’s a few circumstances where the soundest advice is probably to not repay certain debts.

If you have few assets and your income is so low that most or all of your essential property can be protected by claiming statutory exemptions, then your (unsecured) creditors cannot garnish your income or take exempted personal property.

For anybody who live exclusively on retiree / disability / survivors / SSI and/or other benefits that are protected from creditors, I would not recommend that they make sacrifices to repay unsecured debts. I suspect that many retiring baby boomers will bury their toxic debts in this way. And I’m pretty sure I’ve seen some dead student loans walking, but we’re not past mourning stage one…

A limited number of people who have a steady income, equity in something they want to keep like a home, but unsurmountable debt, might consider Ch. 13 bankruptcy. A more limited number of people with few assets but lots of debt might consider Ch. 7.

Generally speaking, if your unsecured debt has been sold to a third party debt buyer, then you should think twice and probably consult an attorney before going further (same obviously applies to bankruptcy). Debt buyers buy charged-off debt for on average 4 center per dollar of debt face value, then sue for the full amount plus substantial interest and fees. Mostly they buy credit card debt where there have been multiple prior unsuccessful attempts to collect. They’re also super shady.

Because they buy thousands of debts and flood courts with just as many lawsuits, they don’t actually submit evidence or check if the debt is beyond the statute of limitations, if it was previously disputed, an identity theft report, etc. Often times, if the supposed debtor just files a simple response that generally denies the lawsuit (in some states, not a lot more than checking a few boxes on a form), then there’s a decent chance that the debt buyer will withdraw the lawsuit (or try to settle then give up)? Basically, debt buyers love default judgments like hogs love shit. It’s not worth it to pay people to review and prove their entitlement to collect a debt (if any) when fishing for unsophisticated people who won’t show up is so much more profitable.

Hospitals and their collection agencies are sometimes willing to negotiate less-than-full settlements and payment plans. This actually applies to most creditors – it never hurts to ask for a deal. Remember, your creditor’s options are: (1) collect it myself; (2) pay lawyers to sue for it, then pay them to enforce the judgment (with uncertain results); (3) pay debt collection agency a substantial commission to (maybe) get it; (4) short sale it to debt buyers for (sum-certain) pennies on the dollar; (5) settle directly with the borrower, for a sum-certain that is certainly more than a debt buyer would pay. The biggest obstacles for the borrower are the information asymmetries (how much will the creditor bend) and the high-volume nature of lending and collection, which can sometimes make bargaining frustrating and cumbersome. But it can and does happen and is worth pursuing more often than actually occurs.

One last note to qualify the last point – never pay a “debt settlement” or “debt negotiation” or “debt consolidation” or “debt management” company to make payments to creditors on your behalf, and negotiate with them for a fee. These are evil predatory scum and it’s an outrage that more states haven’t banned them outright.

I’m paying off my $40,000 private student loan as quickly as I can. I’m currently at $24,000 after 11 months of a good-paying job. Still, it’s hard. I live in a very affluent part of Monterrey, Mexico in a house that my company pays for. I shop as cheap as I can in downtown Monterrey. People have made it clear to me that I do not shop, look like, or vacation like my social class. I know I have a debt emergency but comments are hard.

I’m not carrying a ton of debt. Between us, I believe my wife and I have about 10,000 in non-house, no-school loan debt. Her car is close to paid off and my car is budgeted for. But we still seem to be broke at the end of each month and we cannot seem to permanently pay down our debts. No sooner do we pay off one bill does something break or a kid gets sick. So advice please on where o start on getting rid of the 10000 grand in debt. If I could do that it would be great.

Hi Michael! Congratulations on getting started. While many on this board don’t think that Dave Ramsey is hard core enough – he isn’t trying to get propel to save enough to retire early – he is probably the best at helping you get out of debt. Go to the library and check out the Total Money Makeover. Set Dave Ramsey’s podcasts to auto download and listen to them – new ones practically every day to help keep you motivated. I haven’t taken his Financial Peace University course, but if you work well in a group environment it would be a great help. You and your wife need to get on the same page and establish goals first. Ambitious goals will get you much farther that wimpy, pathetic, how-can-I-get-out-of-real-work cop outs. You and your wife need to set a budget. You also have to mentally retrain out of a lot of bad habits. On this site there are plenty of people who have no problem with low house debt or investment property debt, and the use of cash back cards. That is not for you! You have a debt problem that is kind of like an alcohol problem, and that kind of debt for you is like going to the bar and saying “I’m only going to have a soda and lime”. Do you really need that second car at all? Are you in too big/expensive of a house? Kids certainly can share bedrooms. You absolutely must set up an emergency fund of at least $1000. However, kids get sick all of the time. This is not an emergency. Set up an account for car/home repairs. Don’t do any repairs that are not absolutely needed. Many people confuse a dated ugly kitchen with a necessary expense. If your house is a huge money pit you may want to sell it and make it someone else’s huge money pit. Remember: each after tax dollar that you spend took minutes/hours of your work and your life to generate. What *things* in your life are worth your *life*?

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